Why Russia And China Are Intent On Salvaging Syria’s Economy

More than five years of armed conflict has had a catastrophic impact on the Syrian economy. National GDP has plummeted to less than 50 percent of pre-conflict output, and according to recent figures, the total economic loss to date amounts to 275 billion USD – around five times the country’s 2010 GDP. As violence continues in several parts of the country, especially in the pre-conflict commercial powerhouse of Aleppo, Syria’s economic downfall can be expected to continue.

The extreme damage to the economy is due to a combination of a 25 percent drop in overall population, the displacement of half of all Syrians, a steep drop in economic activity, capital flight, massive destruction of infrastructure and productive capacity, as well as the loss of 25 million school years for Syria’s children, which will reduce labour productivity for the coming generation. Furthermore, large segments of the Syrian business elite that initially remained confident in the future of the country have lost faith and divested their assets and relocated to neighbouring countries.

Such an economic impact is not only affecting the Syrian population at present, but will be felt for decades, if not generations. If the war ended this year, it would take 10-15 years before Syria’s per capita GDP would return to pre-conflict levels. And as the violence is expected to continue well into the future, total long-term economic costs could reach up to 1 trillion USD – nearly 20 times the 2010 GDP. One vital economic sector that has been hit extremely hard is the agricultural sector. Fighting has destroyed irrigation systems and other infrastructure, depleted water supplies, ruined soil conditions, obstructed trade and caused massive displacement of the farming population. This came on top of Syria suffering yet another drought with cumulative rainfall in 2013-14 being less than half of the long-term average. As a result, Syria’s wheat production has dropped 30 percent compared to pre-conflict levels and made the country highly dependent on cereal imports to mitigate growing food insecurity.

There is however some positive news for Syria’s agricultural sector. Among them is a programme recently adopted by newly-appointed Prime Minister Imad Khamis’ government prudently designed to support the agricultural production. This includes government donations for home agriculture and measures to facilitate domestic food production in addition to potential micro-loans for rural women to further revive the sector and catalyse local growth.

Another extremely important sector for the Syrian economy is that of hydrocarbons. In 2011 Syria’s oil production stood at 400,000 barrels per day but due to heavy fighting over territorial control with oil fields this has now dropped to a daily production of only 15,000-25,000 barrels, with a substantial part extracted and sold by various armed non-state groups. The Syrian army and its allies are, however, currently seeking to regain full control of the country’s hydrocarbon resources and the associated infrastructure, especially in central Syria.

In eastern Hama governorate, pro-government forces backed by Russian airstrikes in late July took control over parts of a key oil pipeline east of Salamiyah. North-east of Palmyra in Homs governorate, fighting is taking place around the gas facilities of Arak while airstrikes regularly target the IS-held oil town of Sukhna. Related: What Is Holding The Electric Car Market Back?

At the Mahr and Jazal oil fields and Shaer gas fields north-west of Palmyra, pro-government ground forces backed by airstrikes are additionally fighting off IS militants in order to increase the daily production. While these efforts will likely only have a minor short-term economic impact, they could prove crucial in the long-term goal of restarting the country’s oil production and benefiting the overall Syrian economy.

(Click to enlarge)

Syria’s hotspot in the struggle for control of hydrocarbon sites

A helping hand

Since the Russian military intervention in September 2015, the battle fortunes of Bashar al-Assad’s government have seen a significant reversal. This has brought relative stability to many government-controlled parts of the country and has also allowed for initial steps of economic reconstruction, a process in which Assad’s foreign allies Russia and China are set to play a key role.

The economic cooperation between Syria and Russia stretches back decades and several Russian corporations have contracts in Syria from before the conflict. According to the Moscow Times these were already worth around 20 billion USD in 2011, and it is a number certain to rise in the future.

Several recent high-level visits to Moscow by the Syrian president himself, his minister of foreign affairs and other government officials have, for example, involved discussions about Russian companies including Gazprom, Soyuzneftegaz, Lukoil and Zarubezhneft getting further involved in Syria’s oil production.

Arms exports have also been a key Russian business interest closely tied to the Syrian government. According to the Stockholm International Peace Research Institute (SIPRI), Russian arms sales to Syria totalled 4.7 billion USD from 2007-2010. The Moscow Times estimated active bilateral arms contracts at 4 billion USD in 2011 alone, including MiG-29 fighter jets, Pantsir surface-to-air missiles, tanks, artillery systems and anti-tank weapons.

Russia has also played a key role in Syria’s monetary system. Since 2012, Russia has been printing Syrian pounds and flying them to Syria to allow the government to pay public sector salaries in spite of rapidly declining reserves. Additionally, Russian President Vladimir Putin has channeled billions of dollars to the Syrian government to prevent a financial collapse.

Eager to cash-in on its massive support for the Assad government, Russia will likely not only seek to replenish the Syrian army’s weapons stockpiles after the conflict, but also seek to ensure a favourable position come the time of distribution of reconstruction contracts in several sectors.

In addition to Russia, China will likely also play a key role in Syria’s post-conflict economic recovery. Although Chinese oil workers were pulled out of Syria in 2013 due to escalating violence, the Chinese National Petroleum Corporation still holds shares in two of Syria’s largest oil producers: The Syrian Petroleum Company and Al-Furat Petroleum Company, while Sinochem also holds substantial shares in various Syrian oil fields. Related: World’s Most Expensive Oil Project Could Finally Come Online

China’s role in Syria’s economic recovery will, however, not be limited to the oil sector. In December, China offered Syria 6 billion USD worth of investments in addition to 10 billion USD worth of existing contracts, as well as a significant deal signed between the Syrian government and Chinese telecommunications giant Huawei to rebuild Syria’s telecom infrastructure as part of China’s 900 billion USD ‘Silk Road’ infrastructure initiative.

China has also been a major exporter of weapons systems to the Syrian government. In the 1990s China was selling Syria ballistic missiles technology and from 2006-2010 the People’s Republic was Syria’s fifth-largest provider of conventional weapons. Chinese exporters have also been linked to Syria’s chemical weapons programmes. In terms of overall trade, in 2010 China was the largest source of imports to Syria.

Aiming to defend these economic interests, Chinese officials recently announced plans to increase humanitarian support for the Syrian people as well as military support for the Syrian government in the fight against terrorism. In mid-August the Director of the Office for International Military Cooperation of China’s Central Military Commission, Guan Youfei, arrived in Damascus and pledged to expand Chinese military support for the Syrian government, likely including both training and military hardware deliveries.

Backed by military commitments to President Assad’s rule, Russia and China have doubled down on their existing business interests in Syria and thus further positioned themselves to play a key role in the future recovery of several sectors in the devastated Syrian economy.

Not only the war but also the US initiated embargo damaged Syrian economy. It severed old and prevented new business relations to the countries that did participate. Russian and China made sure they will not start at zero after the war - while the West will.